Loan collateral decisions and corporate borrowing costs

James R. Booth, Lena Chua Booth

Research output: Contribution to journalArticle

37 Scopus citations

Abstract

We examine the relation between borrowing costs and the presence of loan collateral. We find the presence of collateral increases with default risk, consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral. By explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs, we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis. Alternatively, loans made on an unsecured basis have spreads not substantially different from if they had been secured. The evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization.

Original languageEnglish (US)
Pages (from-to)67-90
Number of pages24
JournalJournal of Money, Credit and Banking
Volume38
Issue number1
DOIs
StatePublished - Feb 1 2006

    Fingerprint

Keywords

  • Borrowing costs
  • Costly contracting
  • Cross-monitoring
  • Generalized bank monitoring
  • Loan collateral
  • Selectivity bias

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this